Friday, December 30, 2011

How To Spot A Bubble

There is much discussion as to the bubble nature of gold these days.  Many headlines have been propagated by the tightly controlled press in order to trick unknowing citizens.  Remember, most of the amateur bubble spotters who own not one ounce of physical gold or silver were fried in the tech bubble and the real estate bubble.  But, now they are experts and will not be burned again.

Consider what is actually happening.  Put down the propaganda, turn off the television and use your brain.  Take a survey or groups you find yourself in.  Ask how many own even one ounce of gold.

Remember, during the recent housing bubble that Taco Bell worker would have purchased one condo to live in and another one as a speculation.

Let's take a look at a real asset bubble forming before our very eyes.  This one is showing stretch marks as it has grown to a size once thought impossible.

How do we know this is a bubble?  Well, the article states that bond funds received record inflows this year.  These types of funds are fed by asset managers and retail investors.  They are the easiest to fleece as they fall for the same trick every time.  Perceived safety, misguided blame and blind faith in media creates the perfect trifecta producing the same fleecing opportunity over and over again.

Most of these investors have no idea that bonds trade in price form.  Listen to them as they discuss the subject, "I don't care I will hold it until it matures."  Really?  They probably told you that speculative condo purchase was a no lose scenario because they could always use it as a vacation home.  Once the price fell by 50% they were in a frenzied panic.

Generally speaking, the price of government and municipal debt instruments are the highest in recorded history.  Buyers are knowingly or unknowingly loaning money at minuscule rates of interest to government organizations that are terribly overextended and cash flow negative.  No sane broker would allow you to purchase a debt instrument issued by a company what was borrowing 50% of its annual cash needs.  But, the US government is currently borrowing nearly 50% of its cash needs and issuing debt at less than 2% for 10 years.

When you observe this set of conditions in a market there is only one reasonable course of action, do not participate.  Shorting the funding mechanism of an overextended government is totally different from that of a corporation.  The government will not go down easy.  As interest rates rise (bond prices decline) the cost of servicing this massive debt rises eating even more of the annual budget.  Austerity will be attempted but GDP will slow dramatically causing public backlash.  Considering the average US resident owns nothing and is underemployed, it is probably a good idea to avoid the debt based financing that has allowed this set of conditions to fester.

So, when you hear someone explaining how gold is in a bubble, ask him or her how much of it they own.  Next ask them what they suggest you purchase to avoid the gold bubble.  Do not be surprised when they tell you cash or government debt.  Also, do not tell them that you have purchased gold as they will be desperate when their paper wealth is priced at its intrinsic value and could present real danger to you and your family.

Editor's Note:
This has been a wonderful year and we are grateful for your attention to the nearly 125 articles posted here.  As we enter 2012 your editor is attempting to launch a very innovative investment fund targeting early production gold and silver mining companies.  The incredible regulatory and procedural hurdles created by your elected representatives will be taking a greater share of our time.  This could have a deleterious effect on our writing efforts.  If you have interest in discussing the above mentioned pursuit please email

Make it a profitable 2012 by using your God given ability to objectively apply reason and logic when making decisions.  After all, this is what has secured your place at the top of the food chain and even though your educators tried to squelch it entirely, dust it off and trust it.  You will like the results.

Tuesday, December 13, 2011

Gold Update

At this time we see no reason to augment our practice of voicing opinions just hours before the spin statement is released by Benny and The Inkjets.

A quick note to readers who still believe that the Federal Reserve is acting in their best interest.  The Fed is a private institution owned by the member banks, who are also privately owned and tightly controlled.  If you own common JPM shares, you unfortunately do not have any say regarding corporate direction.  Your share vote is superseded by a voting class of shares that does not trade.

When selecting members of the Fed, loyal academic types are sought.  The decision to be released is handed down based on the needs of the member banks.  At times political considerations are made in order to prevent the lynching of public officials in exchange for legislative favors or other consideration.  Most Americans are unaware that congress controls the country's checkbook.  When it spends an extra $1,500,000,000,000 in one year, the Fed creates currency to purchase those extra bonds.  Then the primary dealers buy the bonds at auction and flip them to the Fed keeping a vig as compensation for their efforts.

Now to our update on gold.  Last week we published a bold call that gold was forming a near perfect pennant characterized by lower highs and higher lows.  Since that time the same pennant has shown up on many other sites.  Yesterday's gap down, followed by sustained selling, did not violate the lower range of the pennant.

We have no idea what the Chairman will spin to us today but in the event that his propaganda and complex academic speak send gold prices lower, the next level of support would be the 200dma shown in red.  Following that we would call $1,550 as a general support area.  A break below that would be highly unusual and at this time we can not even make arrangements for such an unlikely scenario.


Friday, December 9, 2011

Gold Technical Update

Yesterday we were forced to witness a pathetic charade in the halls of a congress that claims to defend freedom.  The citizens falsely and blindly trust that congress will ameliorate markets by honestly seeking answers.  This is not the case.

We will attempt to simplify this situation in an effort to help you understand what has really happened and hopefully help you plan accordingly.

Pretend that your attorney deposits a settlement check from your case into his firm's escrow account on a Wednesday.  The funds may not be distributed for two weeks based on court order but the case will be settled upon receipt of funds.  The escrow account provides both parties with the security and trust needed to enter into a final settlement agreement.  The following Monday, your attorney's firm files for protection from creditors under Chapter 11 of the bankruptcy code.  You had no way of knowing that the prestigious firm of 200 lawyers had entered into a number of risky business transactions and was now insolvent.  This should not impact you though as the law absolutely states that escrow accounts are to be strictly segregated.

Two weeks have passed since you signed the final settlement agreement and funds may now be distributed.  Your attorney informs you that he is unable to locate the settlement funds.  The bankruptcy trustee has notified him that they are trying their best to determine what happened to your funds but at this point there is nothing that can be done.  It appears that the escrow funds were raided in a last ditch effort to back off creditors and hide the squalid nature of the firm's financial decisions.

This is precisely what took place at MF Global.  US securities laws state very clearly that customer funds and company funds may not under any circumstances be commingled.  Now, honest and unknowing clients seek answers as to the whereabouts of nearly $1,500,000,000 in unencumbered cash deposits.  But, there are no answers.  There are only lies and cover-ups offered by bought and paid for spineless politicians.  Jon Corzine is a criminal.  He is a filthy street thug disguised in an overpriced suit that was paid for by trusting account holders at MF Global.  Jon Corzine received a waiver from regulators allowing him to operate without obtaining a current securities license.  

The system is broken.  How long will it take you to understand what is happening?  How long will it take you to stop calling this editor a conspiracy theorist and start looking at the real conspiracy which is stealing your money, your freedom and your future?  It is time to wake up.

When conditions are such that the financial system allows parties to default on contracts at their leisure you must protect yourself.  Remember, when the bankers owe you they default.  When you owe them they get a bailout, paid for by you.  You must insure that you are not in contracts that could leave you stranded in the event of systemic failure.

A reasonable amount of cash should be kept on hand.  Precious metals should be considered as they are the only true asset with no counter-party risk.  Please, do not purchase the most common gold fund pushed by the fascists as you will one day see that the gold they have sold you is not there.

Speaking of gold we must update you as to the technical behavior of the world's only unencumbered asset.  We reached a high in September and have been consolidating for roughly 10 weeks.  As the chart below will show, current support is found in what was resistance dating back to May 31, 2006.

This support should hold, if not $1,530 would be the lowest possible level that we can see.  This is all occurring within the context of a normal consolidation.  The movement in gold has been very structured and stable.  There is not yet any price action that would suggest a bubble or speculative top formation.  Consolidation action can occur in a downward fashion or over time.  Time is a factor in markets that very few understand.  In this case, 10 weeks of pennant formation should be seen as a very healthy consolidation likely in preparation for a move over the psychological $2,000 level.

Wednesday, December 7, 2011

Watching The Board

Most people ask the question, "So what is going to happen next?"  They have little understanding of how things really work.  There is not a linear solution that one person knows and prescribes to a problem.  The person asking this question is hoping to push the responsibility of thought onto someone else.

People, groups and nations are driven by self interest.  The key to predicting what comes next is to focus on the whole board.  In chess, consideration must be given to every piece not just the one currently in play.

China controls 35% of the world's naturally occurring rare earth elements.  More importantly, they control 97% of current production.  The west is desperately trying to develop production but this takes time.  Current market conditions have sucked the bid from equity related to non-core asset classes.  The world is broke and severely under capitalized.  When central banks slow the pace of money creation, or even redirect it, asset markets quickly develop drought conditions.

While this is taking place, we notice that the nation holding the key to our rare earth needs also controls the world's most critical shipping lane for manufactured goods.  We must clarify that as the most critical oil shipping passage, the Strait of Hormuz, is also being challenged at present.

As we survey the entire chess board we notice two key situations.  First, equity related to non-Chinese rare earth developers is being priced near or below liquidation value.  Second, the US is still behaving as if China must obey its every demand.

The disparity between these two factors is shocking.  In this case, adding to rare earth positions in companies who aim to be in production prior to 2015 seems logical.  The financial risk on this trade has been reduced by  central banker decisions and how those have effected asset markets.

Monday, November 21, 2011

How To Read The News

It is critical that investors acquire the skills necessary to properly read the news.  Simply picking up a mainstream periodical and absorbing presumed factual information is tantamount to a self imposed death sentence.  Journalistic trickery requires investors to vigilantly pursue objectivity in order to protect and grow precious capital.

Two weeks ago we showed you an example of this as highly regarded Bloomberg News released the following two stories within a 3 hour period:
A novice news reader could be very confused by this information.  His plight is only exaggerated by the 200 point daily market swings which have become normal.  In this particular case, the news reader should check his American Express annual summary and see what effect monetary inflation is having on his life.  Perhaps it would be obvious that the cost of everything purchased is rising while the value of everything owned is declining.  Investments decisions can be altered accordingly.

This morning we are struck by the following headline which has been written for effect.
We are to feel doom as a shock to the rare earth market must be imminent.  Panic must be looming in the ranks of shareholders.  Only fools will be left holding the above mentioned shares.  The article continues:
In order to objectively process this information we must consider all facts acquired though past research and market participation.  Rare earth prices have experienced outrageous gains over the past 18 months.  Are we to assume that these gains have evaporated?  The rest of this paragraph offers a statement likely missed by most readers:
Wait a minute.  This looks like an entirely different story yet has been taken from the same paragraph as the previous statement.  We perceive a price rise of 1,140% in roughly 18 months.  How can this be?  Imagine if the title of the article were changed to, "Even After Vicious Declines Rare Earth Prices Still Up 1,140% In 18 months!"

How To Profit From This Skill:

We aim to help readers understand how to profit from these observations.  New readers should know that rare earth element prices affect the current or future gross revenue per kilogram of product produced by mining firms in this sector.  When market sentiment turns negative, it is critical to observe what the actual operating conditions look like for companies in that particular business.  In this case, they look incredibly good.  The companies we cover have little or no debt, plenty of cash, rich deposits and demand growth for the next half decade.

When unaware journalists cause share prices to decrease in a move that contradicts reality, favored stocks must be accumulated.  The inverse is true when you see statements touting the fact that a price rise will never end.  Understanding how to objectively read the news and take counter intuitive action can be a very profitable skill.

Friday, November 18, 2011

The Lost Art of Asset Stewardship

The mega-banks have assembled armies of "Wealth Advisers" charged with the mission of rounding up all liquid assets located in their orbit.  Once on-boarded, funds are sent to the New York sausage factory to begin their slow yet volatile descent in value.  All of these firms sing the same tune.  If you get to know former employees closely you will notice that heretics are swiftly removed and often find a tarnished reputation difficult to overcome.

What ever happened to forward thinking, seasoned, responsible asset stewardship?  Well, obviously if you demonstrate the ability to think for yourself objectively, you are not going to be the team player that the NY boys are looking for.  Herd thinking has been rewarded so heavily that the financial industry has nearly disposed of all free thinkers.

It appears that there is at least one left and the Wall Street Journal recently found him.  Click the link to view the entire article.


Wednesday, November 16, 2011

Uranium Prices

We currently live in a yield starved environment which is man made.  Average citizens are experiencing a painful deflationary portion of the business cycle characterized by poor access to credit, high regulation, a decreasing standard of living and an increasing cost associated with basic life.  Connected citizens have access to risk free capital and special arrangements in an effort to create continuous prosperity at the expense of the nation.

Consider that MF Global blatantly used cash held in client accounts to relieve margin calls placed on the firm.  Razor thin capitalization is the secret to extracting excessive profits.  This is required to keep up with your peers in the New York banking scene.  Trusting clients are left with margin calls of their own and must liquidate positions while waiting for a bankruptcy court to recover their cash balances.  Do not expect to see any senior management from MF Global headed to jail though because being connected in the US is the key to legalized theft.

If you are a regular citizen investing is difficult in a manipulated, centrally controlled system.  Unfortunately you must venture to sectors of the market where the cartel has not yet dispatched its criminals to begin taking what they believe is rightfully theirs.  One market that is ripe for future exploitation is the Uranium mining shares.

Consider this chart of uranium prices.  Notice that the post Fukushima reaction did not reach the prior support established in the late summer of 2010.
This next chart is perhaps easier to focus on as it tracks physical uranium:

If you are not aware of the incredibly bullish fundamentals present in the uranium market please consider this article Uranium Market Fundamentals.

The emotional selling that occurred after the Japanese disaster was a severe overreaction.  The world is approaching 500 active reactors.  If Japan and Germany close 20 over the next decade that will be merely a speed bump on the way to 750.  Saudi Arabia alone will close 80% of that gap.

In this type of misunderstood market you should consider equity positions in firms with quality uranium deposits in economically meaningful grades.  Also, make sure you are buying firms run by competent men who are properly financed.  When you purchase equity in a sector that is massively under supplied while at the same time loathed by a society that refuses to live without power you are setting yourself up for excessive capital gains.

Friday, November 11, 2011


Today we are perplexed by the release of these two stories from Bloomberg.  They were issued within hours of one another.  We have highlighted the time of release so that you can observe this for yourself.

We have repeatedly told you that one of the key missions of this site is to provide readers with some insight into how to regain the ability to think objectively.  Society has slowly convinced many to trade this ability for the perceived safety of a politically correct state controlled utopia that we encourage you to notice does not exist.

Instead of reading articles in the state controlled press and then carrying on with life as if you know the facts, try to be objective and not tied to a certain popular outcome.

Monday, November 7, 2011

Market Cycles

When listening to average investors discuss their experiences, it is not uncommon to observe a regretful tone as they recount what could have happened.  "If I had just sold that last condo in 2007 I would have made $30,000 instead of getting wiped out."

In the US we currently hear this story as people discuss the real estate market.  It was not long ago that the same sad tale was told regarding tech stocks.  Before that, the S&L crisis, black Monday in 1987 and the Nikkei top at 40,000 followed by a painful 20 year consolidation.  Your memory stops there but the same patterns occur hundreds of years into history. 

What if there was a pattern in this series of panics?  What if objective observation showed that there was a time sequence to these events?  While economics set the stage, were these events predestined?  Money flowed into each asset class building momentum.  This hot money flowed in at such a pace that it became an overwhelming crescendo leading to a painful collapse.

There is one man who has dedicated his career and freedom to the study of these cycles.  Initially his discovery brought great success but the closer he got to the top of the pyramid, the more he threatened the men who truly control the world of finance.  To learn more about his story click the link below.

Thursday, November 3, 2011

Credit Default Swaps

Sometimes readers need a pictorial explanation in order to fully grasp an important concept. In this case, we would like to help you understand what is really happening in the sovereign debt markets. This picture is an effective representation of the circumstances that several multinational banks are facing. This particular structure was a neighbor of MF Global until Monday.

Most of the New York banks, especially the primary dealers, are levered at a rate of more than 20:1 with respect to their base capital. This means that a $5,000,000,000 capital loss can completely wipe out a $100,000,000,000 balance sheet.

Traditionally, sovereign debt is treated as a very stable asset on the balance sheet. Maximum borrowing privileges are typically extended to these assets. Recently, riskier credits have been appealing due to their marginally higher coupons. When risk was questioned, Ivy League executives lashed out accusing heretics for failing to understand the difference between gross and net exposure to risk.

Lets say that back in 2010 a firm bought $500,000,000 worth of 10-year Greek debt that carried a coupon of 10%. This was seen as a smart trade because if readers remember the Greeks estimated that $80-100 billion would solve their temporary issues. Think back to the events occurring in the spring of 2010.

The purchasing institution will seek to protect this asset using a derivative product called a Credit Default Swap. This is an insurance policy that is designed to pay the purchaser in the event that the issuing nation defaults on its obligation to perform as promised. MF Global had significant exposure to Greek, Italian and Spanish credits on its books. Late last week, holders of Greek bonds received a 50% reduction in the value of their investment as a condition of further assistance. The International Swaps & Derivatives Association determined that this was a voluntary event and therefore did not constitute a failure to perform by the Greek government. What is confusing for us is that the event did not seem voluntary?

Immediately following the decision, banks holding Greek debt instruments would legally have to make adjustments on their balance sheets reflecting the new valuation. In reference to our example above, a firm holding $500,000,000 in Greek debt would be required to take a $250,000,000 loss. This was a death blow for MF Global. Margin calls forced the firm to file for Chapter 11 protection late Sunday night.

The Italian government is facing problems far larger than Greece. Italian debt has eclipsed 120% of GDP and Italian GDP is six times that of Greece. More firms will be affected by the ongoing events in Europe. The problem is simple: these nations are over-leveraged and there is no possible way to proceed without a direct devaluation of their debt.

When you hear a firm discussing Net exposure, keep asking questions. We are interested in Gross exposure. If credit default swaps are not going to pay out on the debt devaluation, gross exposure is what matters. The gross exposure to European credit could wipe out several large institutions. Some would assume that this incident would be isolated, affecting only the holders of the paper who should have known better. Don't be surprised when your money market account is inaccessible.

We continue to seek shelter in an asset that is not the liability of any other party, especially a power hungry, underfunded, and over-extended government.

Monday, October 31, 2011

What's in Your Wallet?

If you have not heeded our warnings to flee the the following asset classes you deserve what is coming to you:
  • Savings accounts
  • Certificates of deposit
  • Cash (Beyond a reasonable stash)
  • Government bonds
  • Municipal bonds
  • Currency markets
In 1944 world economic leaders met in Bretton Woods New Hampshire to structure the post war monetary system.  Upon the conclusion of World War II the United States possessed 22,000 tonnes of gold.  This put the US in an incredible position of strength.
In liberal classrooms students are taught that fairness and equality are to govern society.  In real life, strength, power and force determine direction and more importantly who gets to drive.

The dollar would now be the denominator currency with respect to settlement of world trade.  At any time, $35 could be exchanged for one ounce of US gold.  This would allow other currencies and commodities to trade off of this standard.  Pseudo-intellectual know-it-alls call this a "Gold standard" but they are once again wrong.  This is an exchange standard.

By the late 1960's the US was committed to the great society and to a complex military effort in southeast Asia.  Many veterans are unwilling to study what was really happening in Vietnam but sometimes the truth hurts.  This effort was not winnable and financiers funded the opposition.  There was tremendous wealth to be made from the US spending required to continue fighting.  US politicians were determined to please voters receiving new domestic entitlements while at the same time defending positions in the Asian jungle.  Some money would need to be printed in order to prevail on both fronts.

Merchant bankers were delighted to assist the political class in this effort.  Freshly printed dollars were then quietly taken back to the gold window and exchanged for bullion.  This continued until the US was left with 8,200 tonnes of gold.  Richard Milhous Nixon announced that as of August 15, 1971 the exchange window would be closed.  He was also kind enough to explain to an unaware populace that the speculators had caused this problem.

Now the currency was floating freely with no formal denominator.  The problem with this structure is that leaders never met to discuss this arrangement.  The US positioned itself inside the Saudi government in order to create what we call the "Petro dollar."  This was an effective strategy for many years.  Oil trades would be required to settle in dollars.  The Saudi's could control OPEC and we could control our chosen puppet leaders.  What many readers do not know or accept is that the US Treasury has significant operations within Saudi Arabia.  This presence was required because we forced the Saudi's to funnel their petro dollars though the treasury auction system.

In an effort to keep your attention, we will fast forward to the present.  Governments are facing the reality that they have leveraged their societies to unrealistic levels.  There is simply no way of cutting back sufficiently without destroying growth.  At the same time, there is no way to grow out of the hole.  Like a band-aid applied to a severed artery, politicians seeking job security have chosen to print additional currency in "moderation."  While this allows them to avoid pain they are using the citizens as human shields.

Countries must maintain a weakening currency in order to prevent their economies from seizing up entirely.  Japan has tremendous issues in this realm and was sustained by a weak yen for nearly two decades.  Now that other developed nations are rushing to devalue their currencies, the yen has strengthened making Japanese exporters drastically less competitive.  The Japanese government has established a fund to help companies that are suffering under the burden of a stronger yen.

Last night the Bank of Japan intervened in the currency market in order to weaken the yen:
Take special note of the time that this occurred.  Now notice the corresponding impact on the gold price in dollar terms:
When we specifically point out that this gold chart is in dollar terms we are trying to illustrate that the Bank of Japan acting to weaken the yen strengthens the dollar.  For new readers, currencies are only trading against one another in the form of a cross trade.  If you are long yen you must be short dollars, euros, francs or any currency of your choice.

This concept is critical to understand because the currency market is one massive pile of worthless paper.  When paper is rising or falling in value against other paper you must zoom out and see the entirety of the market.  In this case, would acquisition of a tree farm not be the proper course of action for a savvy investor?
These and other actions are occurring with increasing frequency.  Central planners are responding like junkies to the problems created by years of manipulation.  The problem with synthetic addiction is that increasingly large quantities of substances must be ingested in order to maintain or even achieve a high.  In the beginning the drug serves the user but in the end the user serves the drug.  We can only picture the offices of central planners beginning to look like this:
So what is the solution?  We urge readers to consider The Art of War by Sun Tzu.  Chose the battles you wish to fight as each one requires energy.  This is one where we urge you to consider abstinence if possible.  Purchasing precious metals and hard assets using soon to be worthless paper currency is our recommended strategy.

Talk it over with your stock broker but please force him to comment on the world's debt load.  Force him to answer the question of how the debt will be repaid.  If he admits that they will likely devalue the currency to accomplish this insist that he outline an investment strategy that considers this fact.

Thursday, October 27, 2011

Silver 101

Many people do not understand the purpose of silver away from the formal dinner table. requested that we write an informative article on the other precious metal in an attempt to shed some light on the subject.  If you know someone who asks "What is the point in owning silver?" this could be a helpful article to forward along.  Click on the coins to view the entire piece.

Tuesday, October 25, 2011

Follow The Money.....

Why are we fighting in Libya?  Ask the average, well-informed American news watcher and they will undoubtedly answer; "We need to get rid of that awful Qaddafi."  But was Qaddafi awful?  The most sure way to find the answer to why anything is happening is to follow the money.

For 50 years the US had a middle eastern policy that was structured in the following fashion.  Pick a leader who will answer to US demands, covertly assist him in taking control of the nation, then give him the means needed to suppress his people.  As a reader are you uncomfortable with that?  Do you not believe us because 60 Minutes has failed to report this news?

We suggest readers turn off major news networks and turn on their own ability to think for themselves.  Some books that would assist in this process are Confessions of an Economic Hit Man and The Creature From Jekyll Island.  Simple minded future serfs will write off these notions as conspiratorial in nature.  This is not the case.  Deeper analysis will show that your trusted sources for news and information are the true conspirators.  Power, money and control drive humans at all levels of society and the top of the pyramid is no different.

Confessions of an Economic Hit Man will give you an absolutely excellent understanding of the petro-dollar's 1971 rise to power.  Monetary history available on this site will help you see that the Bretton Woods accord broke apart on August 15th of that same year.  The rise of the petro-dollar allowed the US to remain in control with reserve currency status.  All petroleum trades were settled in dollars.  Consider Perkins' account of the US Treasury's involvement in the OPEC leader's operations detailed in Confessions.

Due to the outright abuse of the dollar commodity rich nations have been shunning the accepted reserve currency.  China and Russia will begin bilaterally trading basic commodities this year.
So for a moment pretend you are the leader of a nation that produces 2,000,000 barrels of oil per day and you are tired of listening to your US masters as you watch them losing power internationally.  You are a UN recognized sovereign nation and you have amassed gold reserves of nearly 200 tones.  As a smart business man you decide to conduct trade on the open market and not by blackmail of a failing regime.

So again we ask, why is the US in Libya?  What is most disturbing is that we will likely fight to keep power in this region until we exhaust all resources.  The US citizens will never understand what is really happening.

Sunday, October 23, 2011


Most people have no idea that economics is the study of choices.  Simply put, people's choices are guided by incentives.  When there is no incentive, growth disappears.  Worst of all, disincentive causes an economy to shrink on the margin.  This triggers pain for citizens and often incentivizes leaders to pursue more stringent and extreme measures as power threatens to slip from their control.

Taking this line of thought into consideration it is no surprise that the US commercial property market is in complete disarray.  During a cycle of easy credit, low rate short term loans were modeled with optimistic growth assumptions in order to justify a greater number of projects than would normally be needed.  Today we are left with a dramatic number of overpriced loans maturing.  Creditors are facing the reality that the income assumptions used are no longer accurate.

Lets have a look at this example noticed on a recent trip to Miami Beach.
This high-rise, beach-front building is overloaded with condos that were sold at the peak of the credit boom.  Most of the building is in foreclosure and the units must be auctioned or sold at a loss which takes time. The bottom floor of the structure is composed of retail space.  Starbucks is the anchor tenant but half of the space remains vacant.

Retail space remains vacant for only one reason; the price per square foot is too high.  In defense of this landlord, he would probably explain that due to the cost of construction and expenses associated with the building he can not budge on his asking rent.  He is telling the truth but the reason for this can be traced back to the local government not the developer.

These days the cost of cement and labor are in line with expected reality.  Where developers struggle is the overwhelming burden of insane regulation.  The American's With Disabilities Act required this particular developer to install a wheelchair lift to provide handicap patrons access to the shops.
The cost of this lift effects the overall cost of the structure and in turn increases the per square foot rental rate.  This is only one example of the excessive number of useless requirements that prevent productive use of assets today in America.  The citizens have asked for this level of regulation but seem to be unwilling or unable to support the increased operating costs associated with it.

Everything comes back to basic economic choices.  While the citizens turn to government for more regulation as an answer to every problem they should not be surprised that commerce continues to grind to a halt.  What we are left with is handicap accessible, lead free, eco-friendly, OSHA approved, code compliant buildings with no tenants.  

Wednesday, October 19, 2011

Some Pictures For Your Consideration.....

Sometimes pictures do a better job of explaining what we have been writing about ad nauseum since this site was created.  Some may describe our objective view on world events as negative but savvy readers understand what we are saying.
That is correct folks......183% yield on 1yr Greek paper.    
And again, just a friendly reminder that we urge you to seek tangible assets that are not someone else's liability, especially a bankrupt government.
As the US continues to spend more than $1,200,000,000,000 more than it collects annually in taxes, remember that the difference between Greece and the US is that the latter has lost the ability to manage its money supply.  But, having the ability to print money to paper over problems is not akin to avoiding those problems.  In fact, it is only prolonging the inevitable and making the eventual atonement more intense. 

Monday, October 17, 2011

What Do The Protests Mean?

Here are a few of the judgmental comments we observed directed at the protesters over the weekend:

  • "They are dirty"

  • "They should get a permit to protest"

  • "What are they even doing"

  • "Arrest them"

  • "This is stupid"
Is it stupid? A better use of your mental energy would be to observe what is happening and ask what it means.

Student Loan Debt:
Several protesters have been seen on television ranting about the massive burden placed on them by educational expenses. The natural reaction is to respond with a libertarian statement like, "You chose to borrow." That is true and is our ultimate stance on the issue. While we feel confident in that judgement we should examine the conditions that students are facing today.

Over the past two decades small, private, typically online colleges were created to meet the growing demand for education. But was this all organic demand? The federal government created policies designed to make voters feel that everyone would be educated but was that the case? Deeper analysis shows that the private online college business has been very profitable.

The basic scam was designed like this. Private universities must finance a certain percentage of enrollment, say 10%. They must issue and back those loans to students. Then, the federal government would give them access to a myriad of programs which issued or guaranteed other student debt originating from that institution.

In the analysis of the student loan condition, we see clearly that the incentive to enroll was high because the downside was limited to a small percentage of sales. Paradoxically, the massive increase in degree-seeking students has diminished the value of the average education while saddling the society with debt.

The protesters represent people who previously assumed they were middle class dreamers but are now waking to the reality that they live at the poverty line. Their degrees are worthless and they are unwilling to accept available occupations in the service industry because they are below the standards to which they cling.

There Are No Jobs:
This is another common rant heard from the protesters. Well, there are jobs available; most protesters are just above taking them. And really, who can blame them? For a young graduate with a business & marketing degree from University of Phoenix having just incurred $72,200 (Actual cost) in expenses the prospects are bleak. A change in attitude is going to be required. This will not be easy for a society that has been sold a dream.

The first reason that there are no jobs is simple. The federal government is borrowing an estimated 10% of GDP simply to fund its annual deficit. This does not account for the spending of 100% of treasury revenues in addition to the borrowing. This is crowding out most private sector activity. There is a finite amount of real capital available and when something is borrowed it creates a drain on that capital.

This leads to the second reason why there are no jobs. We remain in a long term serious deflation. This condition has actually been building for nearly 25 years but vigilant intervention in financial markets has postponed our acceptance of reality. What makes this more complex is that some well-connected private sector operators have been able to force their losses onto the public sector in order to incur no pain from their excessive risk taking. They did not however share any of their profit with the society as savvy tax lawyers and lobbyists were employed to produce paper results akin to a start-up operation.

There is limited economic activity on the margin. This condition will not change in the near term and all entrepreneurs should consider this reality before risking precious capital in a hyper-regulated environment void of growth.

If you are a new reader here we should repeat the mission of this site. We aim to help you understand that in order to survive it is critical to develop the ability to think for yourself. Unfortunately the more educated you are the harder this can be. You should be aware that we are not in the solutions business. Attempting to tell the world what to do is narcissistic at best and punished by missing opportunities to profit while expending energy in arguments. We will however predict the likely paths forward and relay our observations of possible consequences.

At this time we find it interesting that the US president, the labor movement and China are all coming out in support of this leaderless movement. One possible outcome is that the mass is used as a catalyst for more spending to include entitlements and job programs. Neither will work but will trigger further increases in federal outlays while temporarily defusing the crowds. This will be viewed as cover fire for us and allow more time to prepare for the junkie to reappear broke, violent and still unaware.

If an entity that is perceived as a threat to Washington leadership gains a foothold in the movement we expect the massive army of mid-level government mules to be deployed in an effort to suppress the protests. Google facial recognition in partnership with Facebook and Twitter can be utilized to quickly identify anyone involved. Expect news stories about how dangerous the protesters are and how they are making it hard to protect the citizens from terror threats based on their distracting behavior. Some readers are uncomfortable with this suggestion but should stop blaming us for being crazy and begin studying the history of how leaders behave while their societies are collapsing.

The outlook for investment capital is bleak. The federal, state and local governments are all starving for cash, but it has been earmarked for debt service. Unfortunately, hard assets and tangible stores of value are still the most attractive investments. Volatility is likely to increase over the next 12 months. Government debt has begun behaving as an asset bubble but retains the authority to force more capital into the sector. This is a concept that investors should spend time studying.

Try to objectively study current conditions and avoid demanding the conditions you were promised.

Tuesday, October 11, 2011

News vs Fact

Most people read a newspaper under the assumption that experts were consulted for its production. They believe that the journalist is rigorously focused on revealing the truth at any cost. Everyone remembers Woodward and Bernstein as they fought for justice uncovering the Watergate scandal.

Nothing could be further from reality.

The news business is complicated. The structure of many reporting organizations is built on the backs of A-student English majors constantly trying to please an editor bent on ensuring they don't take his job. This editor answers to an owner who wants to maintain good standing in his social circle. Many times an article impacts members of that circle or their business interests. As our good friend Bill says, "Follow the money in order to find the truth."

Let's focus for a minute on those A-student English majors. If you have not had the pleasure of speaking with one of these exceptional creatures be sure to do so before handing over $250 for another annual subscription. The overwhelming observation is that they often have no business or investing experience. The logical question is why would anyone chose the reporters' take on a subject over their own intuition in making an investment decision?

We have covered this subject ad nauseum on this site. The newspaper should be used for what it is. Try to read the paper like a wealthy industrialist. Scan headlines looking for insight into how the public is being swayed from one emotion to the next with no grasp on how to predict future events.

The trick to making money in an investment is first to accurately and objectively perceive reality. Next, you must study the incentives in place for society. Finally, capital must be placed in sectors that are dislocated due to peoples' inability to think.

Let's have a look at this cleverly titled piece on rare earth elements. Notice that the editor has requested your attention be directed to the red arrows depicting dramatic losses.

The situation appears to be gloomy for investors yet hopeful for consumers. There is only a slight concern noted in the final paragraph that we might not be able to produce military equipment but surely they will legislate a solution for that.

Consider again those red arrows at the top of the page. They were placed there to inspire a certain feeling in the reader. We felt that a 6 month price chart for each element would be a more accurate portrayal of the facts:

We have thus edited this headline to offer a more accurate portrayal of the current reality:

"After dramatic correction rare earth prices still shockingly high due to Chinese dominance"

Where will the free world find a solution to this problem? Over 95% of current rare earth demand is met from material produced in China. Even as Western producers scramble to achieve production the core problem persists. The current slowdown in China and the bear market in stocks has combined to create a stunning downdraft in the valuations of companies developing rare earth deposits. Even considering these circumstances, 3-4 hard rock mines will be required to meet demand.

The trick to making money in this sector is to see through the clutter and spin in search of facts. If your stock broker is unable to provide coherent direction for your capital with respect to this sector please contact to purchase a copy of our comprehensive report. This actionable report highlights the realities of the market and suggests that capital be placed directly in front of this wave before it hits land.

Thursday, October 6, 2011

October 2008

This is a good time to look back at facts and ignore opinion editorials and media spin.  The simple facts are plainly in view.

The over leveraging of the American home generated unheard-of profits for banks participating in the process.  Initially, a Fannie Mae guaranteed loan with no qualifications was issued.  That loan was sold to a money center bank.  That bank packaged the loan with other loans of varying quality.  That package of loans had a small percentage of quality paper in it but was rated AAA based on a formula.  Then the package of loans was sold to a large investor or pension fund.  Then the bank that sold the packaged or loans bought insurance against the failure of that same package.  AIG wrote these insurance policies.  When Hank Greenberg would not allow the AIG Financial Products division to grow beyond a sensible size he and the company were indicted by Elliot Spitzer.  The charges on the company were dropped once he resigned but he remained in question.  The Financial Products division was allowed to write excessively large amounts of risk insurance on the falsely rated mortgage pools.  Goldman Sachs, Societe Generale, Deutsche Bank, Merrill, UBS and others were the purchasers of these insurance policies.

If the average citizen engaged in this type of behavior state insurance commissioners would be aggressively pursuing fraud indictments on all parties involved.  In this case several of the named groups above are voting stock owners of the federal reserve and taking a loss on those transactions is just not an option.  Instead the public was convinced that if they did not get paid on those illegal bets the world would end and the economy would stop functioning.

So, we have increased the balance sheet of the federal reserve by more than 3x during this time.  Also, we have taken the federal debt to $14,860,000,000,000.  The US is currently running deficits of nearly $1,500,000,000,000 per year.  Simply put, we are liable for excess spending of $5,000 for every man woman and child in the nation.  That is after the actual treasury revenue is spent.

Let's have a look at what has happened to major indices in the wake of this series of decisions.
OK this looks great.  If you held a share of the S&P for three years you have achieved a 0% return.  If you held one ounce of gold you have seen an 85% increase in your holding.

Readers, for just a moment cut though the clutter of the press and popular culture in order to observe the facts.  The banks who received 100% payouts on the insurance contracts written on failed products that they designed and sold have been made whole.  They have been nursed back to life and are flush with cash.  The owners of homes involved in these illicit transactions are in some cases losing everything.

This time it is the federal government that is in question.  The banks control the actions of the federal government.  In the case above the profits of the banks were privatized and the losses were socialized.  Some will ask why this matters?  The average American sees the federal coffers as an endless supply of free credit but it is not.  This interest free period will be over at some time and the bills will arrive in the mailbox.  They are not going to the mailbox of Goldman Sachs or Societe Generale, they will come to your home.

Currently the dollar and the bonds of the US are being treated as a safe haven.  Consider what will happen once the nation is expected to begin repaying these debts?  How can the society grow under the current conditions?  Without growth there will only be one way to cover these debts and that is printing.

Assets that are immune to the effects of printing should be considered.  Also, don't think for one second that holders of assets are going to avoid the bill for these handouts.  Prepare accordingly.

Tuesday, October 4, 2011

Burning The Furniture......

The austerity imposed on Germany by the Treaty of Versailles following World War I created the conditions for an unmanageable monetary hyperinflation and eventually Hitler's rise to power.  During this time the wealthy sold valuable artwork and antiques for any price just to survive.  The poor had little options and even resorted to burning their furniture for heat.  Crippling asset deflation was followed by out of control monetary hyperinflation.  This violent series of conditions led to the backing of a populist dictator as average people were left with nothing else to believe in.

We have written at length on the weakening dollar which was in a firm downtrend from June 2010 until 9-1-2011.  Please consider this chart of our dollar index tracking fund:
Notice that the dollar touched upper resistance in the first week of June 2010 and began an orderly fall that lasted until 9-1-11.  Since 9-1-11 the dollar has been strengthening against other currencies mainly the euro and franc.  Now, consider this chart of the euro and notice the inverse behavior as it relates to what you have seen in the dollar chart:
Clearly, central planners are embarking on coordinated currency devaluations.  They take turns as they try to maintain order while defrauding holders of currency.

How does this effect Americans?

Well, if you hold assets in dollar terms be prepared to feel tremendous pain until the fed initiates QE3.  That could come soon or could take a while.  Once a path of quantitative easing was chosen all other solutions were nullified.  Some readers are not comfortable with that statement but they are advised to "keep dreaming."  Sovereign economies with banker controlled electronic money supplies, which are the liability of unknowing citizens, do not operate like a small business.  Cutbacks and austerity only cause tremendous pain for the society while those in control act to relieve themselves from suffering and economic accountability.

We find it nearly impossible to trade in this environment.  Being in place for the macro trend yet lightening up when the G20 finance ministers meet in Europe for the weekend to determine who is next to devalue is nearly impossible.

Physical metal and unleveraged hard assets remain the only sensible positions.  While it is completely contrary to the major trend and certain long term outcome, holding dollars is profitable until they have completed the euro liquidity expansion.  Part of the reason that this direction is so hard to accept is that dollar money funds have incredible levels of exposure to the European condition.

People, cities, states, banks and sovereign nations remain over-leveraged and under-capitalized.  This cycle of coordinated devaluation and strategic printing for the benefit of connected bankers will continue until the modern currency system implodes.  If you don't like what we are saying feel free to trade as if we are wrong.

Monday, September 26, 2011

Can We Even Own Private Assets?

Readers should note that through the end of the month posts will be sporadic as we write during our travels in Ukraine.

Following up on our silver price analysis we concede that silver broke from a consolidation pennant and fell like a prop in a roadrunner cartoon.

For new readers, silver is a currency not an industrial metal. Although it has a monetary status it trades on a levered commodity exchange and is subject to the management of that exchange. Selling escalated Thursday and Friday growing right into the close. Each move down created a massive and unusual gap. After the market close the CME released their new margin requirements:

While many charting rules are worthless in this type of controlled market, one rule still remains true: all gaps must be filled. The drop in silver created massive gaps on our charts. The likelihood that this is one part of a shock move to permit QEIII is high. In the event that a new round of money printing will be undertaken to "Save" Europe these gaps will be closed rapidly.

This is a wonderful reminder that monetary metals are not intended for "trading" and instead should be the cornerstone of a well-positioned balance sheet. Physical ownership is desirable and leverage is to be avoided.

Finally, China raised requirements on their exchange this morning sending gold down to the basement again

As we move forward ask yourself which assets can be owned in this type of environment? The market strongmen are trying to force you into dollars and sovereign debt. If you don't want these assets, for logical reasons, maybe take a week off and seek clarity. Again, there is an extremely high likelihood that just as the TARP bill was cover for European Bank relief, QEIII is going to provide desperately needed liquidity for continental Europe.

Remember readers, the world is struggling with a mountain of paper debt and all of these nations are bankrupt. There is a massive amount of debt backed by a tiny amount of capital. If creditors were to collect, there would be fights over the recovery of pennies.

The public must be behind the next round of bond issuance as the US is making too much noise over debt concerns. If they must shock the markets into agreeing to further debt enslavement maybe you should seek cover until the obvious is announced?

Wednesday, September 21, 2011

Silver Update....

On Sunday September 11 we posted comments on the technical behavior of physical silver.  Over the past 11 days silver has continued to pursue the tip of a bullish pennant.
Of greater importance, the MACD has shown possible short term capitulation.  As this pennant grows tighter and tighter a breakout becomes inevitable.  The force that builds within the pennant is enhanced as the price action pursues the tip and is finally left with no room which causes the breakout.

MACD is the Moving Average Convergence-Divergence and should be independently researched by readers.  This indicator subtracts the longer moving average from the shorter.  The result gives a good indication of both momentum and direction.  Reaching a low of -0.31 on our chart September 19-20 we now see it moving northward possibly indicating a test of the upper pennant range.

Famously or infamously we continue to post opinions only hours before the Federal Reserve releases comment on monetary policy. As your editors are pure individualists refusing to cooperate with the current economic oligarchy, following our lead should be considered carefully.

In the event that silver fails to advance be assured that we are only building a larger base for a future test.  If we break to the upside be assured that a test of $45 for SLV looms.

Monday, September 19, 2011

Strong Dollar?

The secret to making money in markets is to invest in bullish trends. Doing literally only that and nothing else will allow you to beat most money managers while sleeping like a baby at night. Accurately identifying the bull markets and placing capital in front of a trend is what trips people up.

The problem is that we have been taught to look for linear solutions to life and markets do not cooperate. Anytime someone utters the words "buy low, sell high", simply remove yourself from the conversation to avoid psychic damage. There is no such strategy as this amateur is not likely to possess the ability to price investments on a relative basis.

What is a low price? Anyone with real experience in markets will gladly tell you about some of the traps they have fallen into. We have all bought a stock because it was "cheap" only to later realize that it was about to get even cheaper! Cheap is a relative term and things are only priced in relation to other things. Once accurate pricing has been applied to an issue, then an assumption concerning future conditions should be made in order to predict what the market will offer in the next cycle.

The first step in simplifying your investment life is to identify the major trends currently in place. You can do this exercise on your own but objectivity is the key. Confirmation bias, nostalgia, normalcy bias and other behaviors learned in an effort to feel safe can disrupt this process. In the end, drawing a long term chart is the safest way to identify a basic trend.

Let's use a chart of the US dollar as an example. We will feature NYSE:UUP, the Deutsche Bank Dollar Index Bullish Fund, but you are welcome to use a different metric.

The first thing we should notice is that there is a major, multi-year downtrend in place. That downtrend should be perceived as the major plot in a 1,000 page novel. Throughout the story things will happen but the overall plot will be in place. If the major bands of the chart are broken then the book is over and you must move on to the next one in the series.

Within the context of this major, long-term trend we see that last June represented a test of the top trend line followed by a renewed downward advance. By February 2011 we could establish the short-term downtrend line labeled on the chart. This structure represents a bearish pennant. Picture a line moving from left to right within the confines of a baseball pennant. As it approaches the tip it must make a definitive break either up or down which will indicate a new short-term direction.

To our surprise the dollar recently broke its bearish pennant and shot higher. This was likely due to the realization that Europe is insolvent and most of the world is effectively bankrupt. Fascist leaders are clearly scrambling to defer the costs associated with poor decisions onto the public and so far it is working.

For now, this move higher is a bullish rally within the confines of a well-defined bear market. If you doubt this statement, go back and draw a chart of the dollar from 2001, then from 1971. These short bursts of buying do not subvert the well-defined trend.

On August 15th 1971 Richard Milhous Nixon removed the US dollar from the gold convertibility standard put in place at Bretton Woods in 1944. Since that time we have operated on a floating exchange rate system. The net effect has been a 40-year, 5-week persistent decline in the purchasing power of the US dollar. Only brief rallies have occurred during this sustained downtrend. We are reluctant to trust that capitulation will occur until change is forced upon the political class by economic circumstances.

Do you trust men like this to determine the value of your hard earned savings?

Friday, September 16, 2011

How Does The Machine Work?

People are always asking us, "What will happen next?"  This is part of their desperate search for safety in a non-linear, non-correlated financial world.  The reason we get this question has been covered at length.  People desire an unattainable certainty that they will be safe.  They will almost pay anything to believe this promise.  Unfortunately that is not how things work and certain losses await if this attitude persists.

In a fantastic Bloomberg interview Ray Dalio baffles A-Student, award winning, overpaid journalist Erik Schatzker as he literally gives away his secrets to success.  Ray says that everything is a machine and the key to his success is, "Understanding how the machine works."  He is a smart man and realizes that he can freely give this secret away because the audience is too inept to emulate his style.

Most people asking for direction are looking for a silver bullet.  The true path to profits is a journey and they are not willing to embark on such a quest.  At the risk of boring long-term readers we will again suggest the fundamental traits needed to make money in markets.

In 1993 Steven Landsburg wrote an amazing book titled The Armchair Economist: Economics & Everyday Life.  This text is available in used condition for as little as $2.50 a copy on  Landsburg breaks down how economics is only the study of people making choices based on conditions.  He posits, a sharp metal spike installed in the center of the car steering wheel would eliminate the need for seat belts.  Most readers think this is a stupid suggestion while Landsburg is trying to illustrate that the driver would be so focused on avoiding an accident that the roads would be safer.  Today we have such high safety standards that people are free to send text messages and focus on other distractions while the auto manufacturer provides safety. 

When the study of economics is taken seriously you begin to see it literally everywhere you turn.  It is driving behavior in all aspects of life.  Natural instincts and created incentives drive workers, managers, companies, governments and the direction of our entire society.  Dalio points out that people are baffled as each new detail of the European debt crisis unfolds.  Talking heads like Schatzker make their living by keeping people shocked at each detail while a simple, objective study of the situation would eliminate all surprise.  These countries are broke, there is no possible spin that can be applied.  They simply spent more money than they received in revenue and without the ability to print currency they are stuck.  So, there is a funding gap and who will fill it?  Someone has to purchase the debt required to continue funding these nations.  Go ahead and extrapolate this thought.  Once you take the derivative of this problem into consideration there should be no more confusion as to the nature of and outcome awaiting these debt issues.

This journey is yours and should be unique if you want to really learn how things work.  There are so many dislocated markets around us today that economic study can be practiced outside of universities.  Take for example the true money supply.  M1, M2 and M3 are metrics that today can not be accurately used in market study for several reasons.  The true money supply is a much more accurate measure of currency in the system as it includes:

  • The Currency Component of M1
  • Total Checkable Deposits
  • Savings Deposits
  • US Government Demand Deposits
  • Note Balances
  • Demand Deposits Due to Foreign Commercial Banks
  • Demand Deposits Due to Foreign Official Institutions
Here is a chart of the true money supply courtesy of The Mises Institute:
We know that the average US citizen is watching everything he owns decline in value while everything he buys is rising in price.  The true money supply metric shows us that recklessly created cash benefits only the first owner and has been creeping out into the system.  The average citizen has no ability to benefit from this windfall printing but is subject to its consequences.  Readers should be curious about what this means and how to allocate capital in light of it.  

During a time when the above mentioned challenges are faced and much of the world is bankrupt you should attempt to remove capital from situations that make it subject to the liabilities of others.  Precious metals held in physical form are one of the only choices that average people have if capital preservation is sought.  We concede to Warren Buffett that gold is an awful investment.  

Mr Buffett, we are not worried about investing we are only trying to survive the conditions that you and your friends have forced upon us.

Only you control the direction of your journey in markets.  The best course is to let go of all notions of how things "should" be and let objective thought lead you.  Ray Dalio developed a set of principals that guide him.  Most people are guided by what others think of them and then when they end up in a ditch covered in capital losses they look around for someone to blame.  Mr. Dalio is an independent thinker and a man of intellectual courage.  If we could conceive of two more respectful adjectives to describe him we would use them.  Do not be surprised by the continued success of a man who seeks to objectively trade what is.

Sunday, September 11, 2011

Silver Prices

Before we can give a proper update on the price of silver, two issues must be addressed.

First, if you are invested in a sector mired in a bear market you just cannot make money.  No matter how glossy the presentation or how popular the fund manager, gravity will win every time. As an example we will examine the common motive of the already-wealthy investor: "Not losing money". It is shocking how, time after time, this quest for certainty and safe harbor paradoxically yields the opposite results.

Our observation is this: Investors trade in their objectivity for perceived safety in the care of popular managers. A sharp dresser explaining yesterday's market can be tempting; he oozes certainty as he lays out what happened in history. But try and ask what he sees coming tomorrow.  Ask about the economic factors facing major demographic groups.  How about an opinion on the way capital flows will be affected by these groups as they respond to their newly-realized conditions?

The trick to making money in markets is attaining, if only for a split second, that aforementioned "total objectivity".  The market does not care about glossy presentations or the popularity of managers. This market is an adversary that must be taken seriously.  After all, it is the only enemy of which we are aware that at times has sent bright men jumping from tall buildings when they could not face defeat.

Once pure objectivity has been obtained in a state of true humility you will be in a position to see where capital is likely to flow.  The reason that this state must be obtained is because all other states are driven by the desire to be more secure, wealthier, safer or smarter.  Every time these desires drive a trade your risk of losing increases dramatically.

The second issue we need to cover is the difference between nominal and real prices.  We will keep this section short as this topic has been covered several times already on this site.  New readers are encouraged to use the search box at the top right of the screen to catch up.

Nominal prices are totally and completely irrelevant in making investment decisions.  We are exclusively concerned with real prices.  As we will explain, silver is a screaming buy right now and could be cheaper today than when we were discussing it at $9/oz.  Novice traders embrace total and complete ignorance when they make statements such as, "I will buy silver when it comes down in price a little, it is too high."  While it could come down in price the logic is flawed as a metric for making investment decisions.  These investors are headed for eventual losses; economic discussions in their company should be politely avoided.

Consider the following silver chart covering the past 18 months:
The rise to $50/oz represented an excessive spike and made a pullback likely. Notice that after briefly crossing $50 the price fell relentlessly for days.  The COMEX raised margin requirements 5 times in an effort to force liquidation of paper silver long positions.

When you purchase a futures contract to hold 5,000oz of silver only $21,600 in cash is required for the initial contract.  This provides roughly 9x leverage in that particular market.  If you have $21,600 in your account and the exchange raised the initial margin requirement to $25,000 per contract you have to either post $3,400 to your account or sell the contract.  Imagine if they do that 5 times in 8 days.  What effectively happens is all weak hands are forced from the market.

Here is a 5 month chart of silver:
Silver remains in a major long-term uptrend.  The price of this tracking stock could retreat to roughly $23/oz without disturbing the trend that is in place.  Within that trend we see a strong bullish pennant formation.  This occurs when a trading range develops and becomes tighter and tighter until it breaks either higher or lower into a new short term trend.  Silver is currently trying to break that pennant and at this time it appears to desire higher ground.

Remember our example of how the exchange raises margin requirements to manipulate the price of commodities.  Silver has begun to test its old highs with half of the leveraged removed from the trade.  As they continue tightening silver requirements consider that eventually they will achieve a 1:1 ratio with cash and we will effectively be dealing with a physical market.  

Silver mining stocks are perhaps even more compelling at this time.  Due to the byproducts found in silver mining some producers are operating with a negative cost of production per ounce.  We have covered how to buy metals so many times that you should know what to do.  You can also ask your highly compensated stock broker or wealth adviser what to do in the sector.  If he suffers from denial and continues to persuade you to consider bear market sectors try our search box at the top right of this page.

Thursday, September 8, 2011

Unemployment Claims

Longtime readers know that we are expert linguists specializing in the field of decoding news releases that trick most market participants.  This skill was developed over many years and requires copious amounts of practice before fluency can be obtained.

Today the Bureau of Labor Statistics released their weekly unemployment claims data at 08:30 EST.  The market seems to pay attention to this number even though we have shown again and again how it is manipulated on a level that would embarrass even Soviets leaders.

First lets have a look at the Reuters headline:
Notice how they place the word "Unexpectedly" in the lead off sentence.  We are curious as to who was expecting claims to decrease?

Last Thursday the BLS released weekly claims of 409,000 and today they announced that number after revision was actually 412,000.  It is more than common for the BLS to wait for the headline number to sink in before adding the 1-3% required to reach their actual count.  This tactic is also commonly used by guilty teenagers who slowly reveal the truth piece by piece in an effort to dilute the parental reaction.

Next, move to the bottom of the release for a puzzle that even has us confused.  The word "Eased" was added for political effect as they want to foster the perception that the long term situation is improving.  Continuing Claims, or people still unemployed, is defined by as:
What confused us about this definition is that the last sentence of the article says that there are 7,170,000 people receiving benefits.  How can there only be 3,720,000 continuing claims when there are double that number receiving checks?  What is even more confusing is that the August BLS data states that there are 14,000,000 unemployed persons.

Another often overlooked tactic employed by the BLS is use of The Birth Death Model.  This economic stroke of brilliance subtracts an arbitrary number of people from the claims data under the assumption that business formation took place outside the scope of survey data.
This assumption could only be made by people who do not spend any time in the real economy.  Take a walk down Main Street and see how much new business formation is going on.  The most popular new occupation we notice is panhandling which requires no licensing, insurance, taxes or liability of any kind.  Every corner seems to be hotly contested as the ranks of the beggars continue to swell.  We often wonder how many of these enterprising beggars are also collecting benefits?

What you may be noticing is that the BLS has created many definitions in order to mask the true number out of work.  Here is a list of defined categories that can be found in any BLS release:

  • Initial Claims
  • Continuing Claims
  • Long-Term Unemployed
  • Part Time Unemployed For Economic Reasons
  • Marginally Attached To The Labor Force
  • Discouraged Workers
The labor force is currently reported at 153,600,000.  This means 49% of the people in America can work.  That leaves 51% that do nothing for various reasons. 

Instead of being tossed around by news driven market gyrations try to develop the ability to think for yourself.  Give up on the dream that government agencies have your best interests at heart.  You will one day learn that their motives are to stay in power or retain their own employment.  Their news releases should be read accordingly.

Tuesday, September 6, 2011

How To Make 10% Overnight.....

Currency markets are complex and should be viewed as a giant chess board where each move opens up several new moves. At its core the market is a simple venue designed to facilitate an easy exchange of currency. Trading 1.40USD for 1.00EUR is a simple transaction. Realizing that 10 years ago 0.80USD was traded for 1.00EUR adds the next layer of complexity. Next, try to understand that massive, heavily-leveraged quantities of currency are chasing each other all around the globe, 24 hours a day, reacting instantly to every governmental action. The leverage in this market is so great that even the smallest move in the right direction offers profits for the cognizant trader. Understanding the inner workings of currency markets is important even if nothing more than the concept is retained; readers must see that while the effort put forth at their job rarely fluctuates, the paper currency in their wallets changes in value every second.

We have entered a period of competitive currency devaluation. The entire world has become complacent and seems satisfied with its system of fiat currency. When the US has trouble achieving growth the real reason is that government has become too large of a force in the economy. This can be attributed to a crippling debt burden, over-regulation and the long-term effects of entitlement-backed vote buying. Slowly weakening the currency is one tool employed in an effort to grow GDP. This can work but readers must understand that at best nominal GDP growth will be achieved. On a real basis this behavior arguably damages an economy. The following chart shows the price action of the US dollar over the past year. Consider that if you had $100,000 in a savings account paying 1% you lost roughly $12,000 in purchasing power over this period:

Weakening the currency of a nation has some perceived immediate benefits. This policy helps businesses when exporting goods. When customers are paying for transactions in foreign currency that has retained par value the goods become more affordable. It is also much easier to pay off the debts of yesterday using the more plentiful dollars of today. Consequently, governments do not like a strong currency and will do nearly anything to prevent it. Consider that statement understanding that they are doing everything possible to devalue the cash that is used to pay your wages each week. Also, this same currency that must be devalued is used by you to purchase energy, food and services at an increasingly higher price based on these actions.

Sensible readers are now considering what actions must be taken to maintain their current level of wealth in the face of this outright theft. One option is to become a savvy currency traders watching each tick of the market in order to shovel your fortune from one currency to another in the hopes of evading this destructive force. A second option is to find a true safe haven currency. Some would argue that the Swiss franc offers refuge from the destructive forces controlling the Japanese, European, British and American central banks. The Swiss don't want anything to do with the effects of a strong franc either and they made that clear last night:

We have suggested for years that readers consider a currency that is not under the control of power-hungry humans. This refuge must have certain properties in order to be an acceptable home for wealth:

  • Safe store of value
  • Universal medium of exchange
  • Impossible to counterfeit
  • Natural control of supply

Well, gold and silver seem to be the only forms of money that meet our definition. So let's examine how much an ounce of gold costs when purchased in Swiss francs. It is important to realize that the above mentioned announcement by the Swiss National Bank was released at 09:00 GMT:

Just to be clear, if you are a Swiss factory worker earning 20 francs per hour nothing has changed. But if you take those earned francs and try to purchase an ounce of gold it will now cost you an extra 10%. Maybe you should approach your boss and ask for a corresponding raise to compensate for central bank theft that is out of your control.

To the contrary, if you owned 100,000 francs worth of gold yesterday congratulations are in order as that same amount of gold is now worth 110,000 francs.

Consider the financial condition of the nation which you have entrusted with your wealth. Avoid fixed rate financial transactions in which you are the party agreeing to that fixed rate, as you will likely be paid back in paper that is worth less and less each day. Finally, consider moving some of your wealth into a currency that is not subject to politically motivated devaluation.